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Latest Fed action one more slap in the face for CDs, savings accounts and money market rates

August 11, 2010

| MoneyRates.com Senior Financial Analyst, CFA

The Federal Reserve announced yesterday that it would pour some of the proceeds from earlier investments in mortgage-backed securities into U.S. Treasury bonds. It's questionable whether this will help the flagging economic recovery, but it represents yet another policy decision that could cost depositors.

By purchasing bonds, the Fed aims to keep market interest rates low, and by extension hold down borrowing costs. The Fed is clinging stubbornly to the assumption that low borrowing costs will stimulate the economy -- though perhaps it is more wishful thinking than stubbornness, since the Fed has few other cards to play with the Fed's short-term lending rate already near zero.

Earlier Fed purchases of mortgage-backed securities helped drive mortgage rates to all-time lows, but this has not yet sparked a recovery in the housing market. Similarly, it appears that the general campaign to keep borrowing costs low has been a case of pushing on a string -- making borrowing cheap when there is limited demand for it.

As anyone in savings accounts, money market accounts or other deposit products will tell you, while these low interest rates policies haven't had much of a benefit so far, they've certainly had a cost. Low bank rates have kept interest rates on deposit accounts low. That has taken money out of the pockets of those depositors -- and effectively, out of the economy.

It's hard to say what will shake the economy out of its current doldrums. It is increasingly looking as though it will have to be some outside force, such as foreign demand. Still, that won't keep the Fed from continuing to pursue its low interest rate policies -- much to the chagrin of savers.

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